Private Equity Case Study Offers Some Good Lessons

In the October 24th edition of The Economist is a concise case study of Infinity , a private equity company that has been operating successfully in China since 2004. The article identifies the two major problems that PE companies have in China, and the article identifies reasons why Infinity has been able to overcome these problems.

The two problems:

Western private-equity firms trying to enter China run into two problems: getting their money and getting their money out. The Chinese government keeps an asphyxiating foot on currency conversions. It is hostile to investment that involve restructuring (sacking people and selling assets) and financial engineering. And it has not interest in outsiders flipping assets for fast profits.

How Infinity has overcome these problems:

1. The "Chinese government entities are co-investors in the firm's two funds in the country."
   • Spreading the wealth around is sure to make friends.
   • Their website is too opaque to fleece out the legal structure of Infinity's firms in China. The company was issued a venture-license, which makes it possible to assume that the company is an FIEVC. What isn't clear is what the underlying structure of that FIEVC is? EJV, CJV, WFOE? Research has shown that CJV's are popular in private equity and venture capital as a means of creating the legal fiction of preferred equity in private equity firms, but there is nothing definitive on Infinity's structure.
2. Infinity's "investments have helped create viable Chinese companies in areas rich in technology and intellectual property."
   • Infinity's deals tend to be structured around the shifting of high tech manufacturing to China while maintaining ownership of the technology abroad. While it seems that the government would usually prefer the technology to be transferred to the Chinese entity, it appears that they are satisfied with the technology merely making its way into the country regardless of who actually owns it.
3. "Infinity raised $30m for its first fund in China, perhaps just enough to intrigue China's government but not enough to frighten it."
   • The just right, Goldilocks' sizing of the fund is certainly part of it. But I'd venture that Infinity's country of residence, Israel, plays a considerable role in it, too. Israel just seems less dangerous of a country of origin than, say, the United States, where the sophistication and capability of the PE firm is more presumed. That's not to say a fund from Israel is not sophisticated, but the optics count. Additionally, Infinity's website plays up the close ties between both Israel and China, and the Chinese and Jews in a way that I have never seen on a private company's website.

So, sounds like a good model for succeeding in PE in China. There are two extra hurdles, though: 1) you must have some technology that you want to manufacture in China, and 2) the "transfers of technology and production across multiple countries and entities is horribly complex."